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Office of the Chief Accountant:
Letter from SEC Chief Accountant to the Auditing Standards Board of the American Institute of Certified Public Accountants re: Auditors' Roles in Helping To Structure Transactions

February 13, 2002


Mr. James S. Gerson, Chair
Auditing Standards Board
American Institute of Certified Public Accountants
1211 Avenue of the Americas
New York, NY 10021

Dear Jim:

Recent events have raised questions about auditors' roles in helping to structure transactions in order to achieve a particular financial statement result. I believe that the Auditing Standards Board ("ASB") should take a leadership role with respect to these questions, and I believe that the first step in that process should involve an amendment of Statement on Auditing Standards No. 50 ("SAS 50"), Reports on the Application of Accounting Principles, to prohibit the issuance of a written report to intermediaries on the application of accounting principles not involving facts or circumstances of a particular principal (referred to as "hypothetical transactions" in SAS 50).

I believe that SAS 50, which was issued in July 1986, has improved practices in situations when the reporting accountant's opinion on the application of accounting principles takes into account both the vagaries of the accounting principles being considered and the particular facts and circumstances of the company that will apply the principles ("the principal"). This is in no small part because SAS 50 requires, in these circumstances (and circumstances where the report is issued to an intermediary acting for a principal whose identity is known), consultation with the continuing accountant (i.e., the auditor) of the principal prior to issuance of the report by the reporting accountant. As a result of this consultation, the reporting accountant is able to ascertain all the available facts relevant to forming a professional judgment, including information that otherwise might not be available.

In contrast, an accountant reporting on a hypothetical transaction knows only the information presented by the intermediary-a description of the transaction and, generally, the desired financial statement impact. There is no way for the reporting accountant to know, for example, whether the continuing accountant of the ultimate principal(s) has reached a different conclusion on the application of accounting principles to the same or a similar transaction, or how the ultimate principal(s) has accounted for similar transactions in the past. Therefore, the use of SAS 50 reports in this context, more often than not, does not contribute to high quality financial reporting.

The difference between the two types of situations is very significant and is exacerbated by the fact that many existing accounting standards are based on a highly prescriptive, rules based approach. I urge the ASB to expeditiously amend SAS 50 to prohibit the use of SAS 50 reports in situations that involve "hypothetical transactions."


Robert K. Herdman
Chief Accountant

cc: Alan Anderson, Executive Vice President
American Institute of Certified Public Accountants

Edmund Jenkins, Chairman
Financial Accounting Standards Board

Robert Kueppers, Chairman
SECPS Executive Committee

Jerry Sullivan, Executive Director
Public Oversight Board



Modified: 02/19/2002